money chapter 10 section 1...economics chapter 10 section 2 two views of banking federalists •...
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MoneyEconomics Chapter 10 Section 1
What is Money?
• Money is anything that serves as
– A medium of exchange
– A unit of account
– A store of value.
Money as Medium of Exchange
• A medium of exchange is anything that is used to determine value during the exchange of goods and services.
• Without money, people would barter for goods– Trade one good for another
– Stilled used in many countries today
Money as a Unit of Account
• A unit of account is a means for comparing the values of goods and services. – You will check prices to
find the best deals
Money as a Store of Value
• A store of value is something that keeps its value if it is stored rather than used.
• There is an exception
– Inflation will not all money to act as a store of value
The coins and paper bills used as money in a society are called currency. A currency must meet the following characteristics:
DurabilityObjects used as money must withstand physical wear and tear.
PortabilityPeople need to be able to take money with them as they go about their business.
DivisibilityTo be useful, money must be easily divided into smaller denominations, or units of value.
UniformityAny two units of money must be uniform, that is, the same, in terms of what they will buy.
Limited SupplyMoney must be available only in limited quantities.
AcceptabilityEveryone must be able to exchange the money for goods and services.
The Six Characteristics of Money
The Sources of Money’s Value:Commodity Money
• Commodity money consists of objects that have value in themselves.
– Gold
– Silver
– Copper
• They all have other uses than just money
The Sources of Money’s Value:Representative Money
• Representative money has value because the holder can exchange it for something else of value.
– Think exchanging currency for gold and silver
The Sources of Money’s Value:Fiat Money
• Fiat money, also called “legal tender,”
– Has value because the government decreed that is an acceptable means to pay debts.
– Think currency exchange from different countries
The History of American BankingEconomics Chapter 10 Section 2
Two Views of Banking
FEDERALISTS
• Federalists believed the country needed a strong central government to establish economic and social order.
• Alexander Hamilton was in favor of a national bank – Could issue a single currency
– Handle federal funds
– Monitor other banks
ANTIFEDERALISTS
• Antifederalists were against a strong central government– Favored leaving powers in the
hands of the states.
• Thomas Jefferson opposed the creation of a national bank– Favored banks created and
monitored by individual states.
Banking In The 20th Century
• The Federal Reserve Act of 1913 – Created the Federal Reserve
System. – The Federal Reserve System
served as the nation’s first true central bank.
• The Banking Act of 1933– Created the Federal Deposit
Insurance Corporation (FDIC).– The FDIC insures customers’
deposits up to $100,000. – The nation was also taken off
of the gold standard.• Federal Loans back money up
today
Banking TodayEconomics Chapter 10 Section 3
Demand for money has an inverse relationship
between interest rates and the quantity of money
demandedWhat happens to the quantity
demanded of money when interest
rates increase?
• Quantity demanded falls
• People don’t want to pay
interest on the loaning of
money
• People would rather earn
interest on saving money
What happens to the quantity
demanded when interest rates
decrease?
• Quantity demanded
increases
• There is no incentive to
convert cash into interest
earning assets (Saving
Accounts)
Other Shifters in money demand
• Changes in banking technology (ex: ATM’s)
• Changes in Banking Institution Regulations
• Changes in Real GDP
Nominal Interest Rate (ir)
Quantity of Money(billions of dollars)
20%
5%
2%
0DMoney
Inverse relationship between interest rates and the quantity of money demanded
The Demand for Money
Quantity of Money(billions of dollars)
20%
5%
2%
0DMoney
What happens if price level increase?
The Demand for Money
DMoney1
Money Demand Shifters1. Changes in price level2. Changes in income3. Changes in taxation that
affects investment
Nominal Interest Rate (ir)
The Money Supply
• The money supply is all the money available in the United States economy.
• This can be measured in two ways
– M1
– M2
M1
• M1 consists of assets that have liquidity, or the ability to be used as, or easily converted into, cash.
– Currency
– Traveler’s checks
– Demand deposits (Checking Accounts.
M2
• M2 consists of all of the assets in M1, plus:– Deposits in savings
accounts
– Money market mutual funds.
• A money market mutual fund is a fund that pools money from small investors to purchase government or corporate bonds.
200
DMoney
SMoneyThe FED is a nonpartisan
government office that sets and adjusts the money supply to adjust
the economy
This is called Monetary Policy.
The U.S. Money Supply is set by the Board of Governors of the Federal Reserve System (FED)
The Supply for Money
20%
5%
2%
Quantity of Money(billions of dollars)
Interest Rate (ir)
If the FED increases the money supply, a temporary surplus of money will occur
at 5% interest.The surplus will cause the
interest rate to fall to 2%
Increasing the Money Supply
Increase money supply
Decreases interest rate
Increases investment
Increases AD
200
DM
SM
10%
5%
2%
Quantity of Money(billions of dollars)
Interest Rate (ir)
How does this affect AD?
250
SM1
If the FED decreases the money supply, a temporary shortage
of money will occur at 5% interest.
The shortage will cause the interest rate to rise to 10%
Decreasing the Money Supply
Decrease money supply
Increase interest rate
Decrease investment
Decrease AD
200
DM
SM
10%
5%
2%
Quantity of Money(billions of dollars)
Interest Rate (ir)
How does this affect AD?
150
SM1
Banking Services
Storing MoneyBanks provide a safe, convenient place for people to store their money.
Credit CardsBanks issue credit cards — cards entitling their holder to buy goods and services based on each holder's promise to pay.
Saving MoneyFour of the most common options banks offer for saving money are:1. Savings Accounts 2. Checking Accounts3. Money Market Accounts 4. Certificates of Deposit (CDs)
LoansBy making loans, banks help new businesses get started, and they help established businesses grow.
MortgagesA mortgage is a specific type of loan that is used to purchase real estate.
BANK
How Banks Make a Profit
Deposits from customers
Interest from borrowers
Fees for services
Money enters bankMoney leaves bank
Interest and withdrawals to
customers
Money loaned to borrowers:• business loans*home mortgages*personal loans
Bank’s cost of doing business:• salaries• taxes• other costs
Bank retains required reserves
How Banks Make a Profit• The largest source of income for banks is the interest they receive from customers who have
taken loans.
• Interest is the price paid for the use of borrowed money.
• To make more money a bank will pay out less in interest on deposits than it earns in interest on a loan
Types of Financial Institutions
Commercial Banks
• Commercial banks offer checking services, accept deposits, and make loans.
– Citigroup
– Bank of America
– HSBC Bank
– Barclays Bank
Savings and Loan Associations
• Savings and Loan Associations were originally chartered to lend money for home-building in the mid-1800s.
– They work primarily with mortgages and deposits
– Give higher interest rates than commercial banks
• Washington Mutual is an example
Savings Banks
• Savings banks traditionally served people who made smaller deposits and transactions than commercial banks wished to handle.
– They perform the same functions as a commercial banks
Credit Unions
• Credit unions are cooperative lending associations for particular groups
– Usually employees of a specific firm or government agency
– Students of a University• MSU Federal Credit Union
Finance Companies
• Finance companies make installment loans to consumers.
• They provide banking duties without being considered a bank
• They are held to the same regulations as banks
Electronic Banking
• ATM
• Debit Cards
• Direct Deposit
– (Automatic Clearing Houses)
• Home Banking
• Store Value Cards
– (Gift Cards)